Period

3Q15/9M15

Actual vs. Expectations

9M15 net profit of RM148m (+40% YoY) came in within expectations, at 72% of our and consensus full-year forecasts, respectively.

Dividends

A first single-tier interim dividend of 5.5 sen was declared. Key Result

Highlights

QoQ, 3Q15 revenue rose 15% due largely to contribution from gloves division, which accounted for more than 87% of total revenue. Specifically, gloves revenue rose 16% due to higher volume growth (10% QoQ; 33% YoY) on the back of 85% utilisation rate which more than offset lower ASP. This brings 3Q15 net profit to RM55.2m (+16% QoQ). Note that the product mix of nitrile and natural rubber in 3Q15 is 70:30 compared to 68:32 in 2Q15.

YoY, 9M15 revenue rose 28% to RM1.2b thanks to higher glove sales volume (+34%) and higher RM ASPs due to the weaker USD against MYR. Higher volume sales, better product mix (the product mix of nitrile and natural rubber for 9M15 was 68:32 (versus 60:40 of FY2014) and improved operational efficiency led to 9M15 EBITDA margin of 20.5% compared to 19.4% in 9M14. This brings 9M15 PATAMI to RM148m.

Outlook

Looking ahead, growth in subsequent quarters are to be driven by Plant 2 and 3 with 4b pieces per annum of capacity expected to be running at full capacity. We understand that clients have been found for the new capacity. This brings the three new plants installed capacity to 22b from 16b per pieces of gloves per annum.

We understand that another phase of expansion is expected due to overwhelming demand for various glove products. Recall, at end-Dec 2014, Kossan acquired a piece of freehold industrial land measuring 13.3 acres located in Kapar, for a cash consideration of RM39m. We also understand that the land is earmarked for two manufacturing glove plants and a warehouse.

Change to Forecasts

No changes to our earnings forecasts.

Rating & Valuation

We roll over our valuation from FY16E to FY17E. Correspondingly our target price is raised from RM8.16 to RM9.11 based on unchanged 22x FY17 EPS. Since our Outperform recommendation back in early year 2013, the stock has risen by five fold. In terms of YTD 2015 performance, the stock has gained 99%.

We like Kossan for: (i) its superior net profit growth of 43% and 15% in FY15E and FY16E, respectively, and (ii) the unprecedented earnings growth over the next two years underpinned by rapid capacity expansion. However, valuations appeared stretched trading at +2.0 SD above the 5-year historical mean. Hence, we are downgrading its rating to Market Perform.

Risks

Delay in commissioning of new production lines.

Source: Kenanga Research - 20 Nov 2015